[Akshay Dhekane is a 5th year B.A., LL.B. (Hons.) student at National Law University Delhi]
In the Indian markets, hostile takeovers are a potent but rare strategy to gain control over companies. Recognizing their importance the Supreme Court in Pramod Jain v SEBI held: “A hostile takeover helps to unlock the hidden value of the shares and puts pressure on the management to work efficiently”. However, when the target is a non-banking finance company (“NBFC”), this process acquires further complication. The tussle between Religare Enterprises Limited(“REL” or the “Target Company”) and the Burman Group (“Acquirers” or “Burmans”) over a hostile takeover has brought to light a critical gridlock between the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (“SAST Regulations” or “Takeover Code”) and the Reserve Bank of India’s (“RBI’s”) Master Direction (NBFC – Scale Based Regulation) Directions 2023 (“SBR Master Directions”). The interplay between these frameworks complicates transactions, raises concerns about shareholder rights, and the overall effectiveness of the regulatory regime. This post examines the regulatory inconsistencies brought to light by overlapping processes for change in shareholding or control of NBFCs.
The Conflict between SAST Regulations and RBI Master Directions
The Securities and Exchange Board of India (“SEBI”) regulates the acquisition of shares and control in listed companies through the SAST Regulations. These regulations are designed to ensure transparency, protect investors, and promote fair play. On the other hand, the RBI focuses on maintaining financial stability, and protecting depositors interests. The RBI regulates NBFCs through the SBR Master Directions to ensure that the operations of NBFCs are not conducted in ways that harms investors, depositors, or the NBFCs themselves. According to these directions, NBFCs must obtain prior written permission from the RBI for a change in their shareholding or control. However, this requirement conflicts with the SAST Regulations, particularly in the case of hostile takeovers of NBFCs. Since RBI approval is required, an acquirer cannot fulfil their open offer obligations without the target company’s cooperation.
This interdependence became a significant obstacle in the matter of Religare Enterprises Limited (“Religare-Burman”). REL is a listed core investment company (“CIC”) and is registered with the RBI as an NBFC. REL made news when the Burmans crossed the 25% shareholding threshold and triggered an open offer obligation under regulations 3(1) and 4 of the Takeover Code. An open offer is designed to invite shareholders to tender their shares at a specified price and is primarily designed to provide an exit option in the event of a change in control or substantial acquisition of shares. To that end, the Burmans made an open offer but one that found itself entrapped in a complex regulatory maze.
Under regulation 18(11) of the SAST Regulations, the acquirer is explicitly required to “pursue all statutory approvals required … to complete the open offer without any default, neglect or delay.” However, paragraph 42 of the SBR Master Directions introduces an impediment or conflicting obligation by requiring a NBFC, i.e., a target company, and not the acquirer, to obtain RBI’s prior approval for any acquisition or transfer of control. Specifically, RBI’s approval is required under three cases: first, in cases involving a change of management or control; second, when there is a change in shareholding resulting in any takeover or acquisition or transfer of 26% or more; and third, if there is a change in 30% or more of the board of directors (excluding independent directors).
Generally, it is understood that the RBI and other statutory approvals are obtained by the NBFC for the incoming investor, essentially requiring both the entities to undertake a combined effort to obtain RBI approval. In Religare-Burman this conflict became apparent as REL’s board was non-cooperative with the Burman Group and declined to apply to RBI and other statutory bodies for approvals. Thus, the Burmans attempted to seek RBI’s approval for change in control or management; however, their application was not entertained as the SBR Master Directions only permit an NBFC, i.e., the target company to apply.
Thus, an acquirer cannot fulfil their open offer obligation independently until the target NBFC applies to all required regulators for prior approvals. This interdependence can be used by target NBFCs as a defence strategy to resist hostile takeovers by delaying or withholding statutory approvals like RBI application, thus rendering hostile takeovers obsolete. These tactics lead to several outstanding issues.
Differing obligations imposed by SEBI and RBI
The SAST Regulations adopt an acquirer centric approach towards open offer obligations. They require an acquirer to follow the prescribed process and obtain approvals. Moreover, these regulations neither prohibit hostile takeovers nor provide significant defensive mechanisms to targets.
The RBI has required acquirers to meet change in control obligations, similar to SEBI’s SAST Regulations. For instance, section 12B of the Banking Regulation Act, 1949 mandates that an “acquirer” obtain prior RBI approval if it obtains 5% or more shares in banking companies. However, paragraph 42 of the SBR Master Directions takes a target-led approach for seeking RBI permissions for an NBFC’s acquisition or takeover. This deviates from SEBI’s acquirer-centric philosophy.
Interestingly, the SBR Master Directions only impose a procedural requirement on the target NBFC to seek RBI approval for a change in shareholding or control, and the final determination rests with RBI. The target NBFC is not granted any discretion in assessing if the acquirer meets the “fit and proper” criteria. It raises a question regarding the rationale for adopting a target-led approval process. This lack of discretion is evident through RBI’s enforcement actions against Nido Home Finance Limited and West End Housing Finance Limited where RBI imposed monetary penalties against these entities as they failed to obtain prior approval under the NBFC HFC Directions, 2021. These Directions adopt a similar language and operational requirements as under the SBR Master Directions. Thus, these enforcement actions highlight that NBFCs do not function as decision makers in such transactions and their role is limited to procedural compliance. Considering this, the requirement for the target NBFC to initiate the approval process appears to be an unnecessary regulatory hurdle rather than a substantive safeguard.
Introducing inefficiencies
There are numerous inefficiencies introduced for the acquirers, targets and even the shareholders. The SAST Regulations require that the acquirers deposit 25% or more of the open offer consideration in an escrow account for the offer period, thus locking their funds for years in prolonged cases like Religare-Burman. Generally, investment funds operate within defined life cycles and unduly prlonged deals can be detrimental to the acquirer’s interests by locking up its funds. Delays are known to diminish commercial viability of the deal as time sensitive transactions lose value, and face increased costs. Furthermore, there are no timelines for sending an application and its approval in the SBR Master Directions thus increasing the uncertainty.
Regulation 20 of the SAST Regulations prohibits competing offers for the target company beyond 15 days of the detailed public statement. If the first offer is stalled, the target’s takeover prospects reduce and it prevents shareholders from benefiting from competitive bids. In this case, SEBI rejected a competing offer despite it offering a 17% higher price. Furthermore, for shareholders these delays weaken the Takeover Code’s objective of providing a timely exit. Delays between open offer announcement and receiving payments restricts shareholders’ exit right and market fluctuations during this period can erode the offer’s attractiveness due to upward or downward share price revisions. It demonstrates how procedural delays limit shareholder value maximization and stifle market efficiency.
Withdrawal of open offer
It is established that once the open offer period has commenced the withdrawal conditions in the Takeover Code are already in force as observed in SEBI v Burren Energy India Ltd. SEBI maintains a strict approach, allowing withdrawals primarily on grounds of impossibility of performance. Grounds such as that the offer has become outdated, uneconomical or commercially unviable have not been accepted as valid grounds for withdrawal. The Supreme Court in SEBI v. Akshya Infrastructure (P) Ltd (2014) and the Securities Appellate Tribunal in Pramod Jain (2014) reinforced this, holding that regulatory delays in obtaining approvals even from SEBI itself do not justify withdrawal as they can create opportunities for market manipulation. The Court reasoned that delay in performance of its duties by SEBI cannot be equated to “refusal of statutory approval”. Thus, withdrawing on grounds of delays caused in obtaining approvals from other regulators seems to be a long shot for acquirers.
Nevertheless, in such cases acquirers can argue that the regulatory structure makes it impossible to proceed with the open offer. Regulation 23(1)(c) allows for withdrawal where any condition for “open offer is not met for reasons outside the reasonable control of the acquirer”. There have been no cases interpreting this provision but even a narrow interpretation of regulation 23, as carried out in Akshya Infrastructure and Pramod Jain, may lead to the conclusion that “beyond control” is assessed with reference to the principle of impossibility rather than mere delay or inconvenience. Here, RBI’s approval must precede SEBI’s clearance for undertaking open offers. This makes it a precondition and at this stage arguably investor interests are not violated as shareholders cannot tender their shares until SEBI approves the transaction. Furthermore, as the approval application itself must be moved by the target NBFC it fundamentally creates a situation “beyond acquirer’s control”.
Thus, while there is a strong case for withdrawal on grounds of impossibility due to this deadlock, SEBI’s restrictive approach makes withdrawing highly improbable. This would lead to mandating acquirers to complete the offer even if it becomes academic.
Way Forward
The Religare-Burman case exemplifies how a regulatory misalignment undermines acquirers, prejudices shareholder rights, and creates inefficiencies in the system. However, this issue is not unique to NBFCs and the RBI. A similar approval requirement exists under the circular issued by the Insurance Regulatory and Development Authority of India for insurance companies, thus raising the broader question of whether Indian financial regulators should move towards a more acquirer centric approach in takeover transactions.
To address this, SEBI and other financial sector regulators must recalibrate their regulatory approaches and ensure that statutory approvals do not serve as defensive tools for market-driven acquisitions. Risks in acquisitions often stem from the acquirer’s financial health and governance, making an acquirer-centric approach more effective in addressing root causes. There is a need for a uniform approach in regulating transfers of shares or control, and that too with defined timelines. There is a need to improve efficiency, reduce unnecessary costs, and eliminate unwarranted constraints while faithfully implementing statutory requirements.
– Akshay Dhekane
